How does private mortgage insurance work?

A:

Quick Answer

Private mortgage insurance protects the lender if the borrower is ever unable to complete payments on his loan and ensures the lender still receives payment, according to Zillow. Usually, private mortgage insurance is mandatory for borrowers who offer less than 20 percent of the home's value for a down payment.

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In most cases, a borrower has to continue to pay for private mortgage insurance until his loan-to-value ratio is at least 80 percent, notes Zillow. The borrower can also build up adequate equity in a home, usually 20 percent, until he no longer has to have mortgage insurance. While lenders usually don't cancel private mortgage insurance until after the borrower reaches 22 percent equity on the original estimated value of the home, the borrower can request to cancel the insurance plan once the equity reaches 20 percent.

The amount a borrower pays for private mortgage insurance usually depends on his credit score at the time he takes out a mortgage and how much he provides for the original down payment, says Zillow. As of 2015, monthly premiums range from $30 to $70 for every $100,000 borrowed. Compared to the rates for FHA loans, the rates for conventional loans are often less expensive, states the Consumer Financial Protection Bureau.